Monday, August 29, 2005

A top Army contracting official who criticized a large, noncompetitive contract with the Halliburton Company for work in Iraq was demoted Saturday for what the Army called poor job performance.

The official, Bunnatine H. Greenhouse, has worked in military procurement for 20 years and for the past several years had been the chief overseer of contracts at the Army Corps of Engineers, the agency that has managed much of the reconstruction work in Iraq....

The demotion removes her from the elite Senior Executive Service and reassigns her to a lesser job in the corps' civil works division.

Ms. Greenhouse's lawyer, Michael Kohn, called the action an "obvious reprisal" for the strong objections she raised in 2003 to a series of corps decisions involving the Halliburton subsidiary Kellogg Brown & Root, which has garnered more than $10 billion for work in Iraq.

Known as a stickler for the rules on competition, Ms. Greenhouse initially received stellar performance ratings, Mr. Kohn said. But her reviews became negative at roughly the time she began objecting to decisions she saw as improperly favoring Kellogg Brown & Root, he said....

Sunday, August 28, 2005

It's funny how culture battles of the past smolder on even years later. I have in mind here a battle between factions on the same side, not a divide on the level of Jerry Falwell versus Jerry Garcia, say. Rather, Beatles versus Stones, that staple of the late 1960s.

The dying embers of this ancient dispute were revived by a NY Times op-ed about the Beatles and their lasting impact. I didn't personally think the op-ed added a whole lot or said much of enormous interest, so I figured the Times' internal op-ed selection politics must have been at work in some unknown way. But judging from the volume of letters about the op-ed that the Times published in today's Week in Review, it must have been a real audience pleaser.

Anyway, two of the letters revive the Rolling Stones fans' side of the dispute. The op-ed had obtusely cited the Beatles' "Revolution" as indicative of the revolutionary political spirit of music at the time, so the first letter rightly points out that "Revolution" is anti-political activism, and indeed "the Beatles' declaration of blissed-out withdrawal," whereas the Stones sang that "the time is right for fighting in the streets."

Yes, and (showing my age) I actually remember how much the radio stations played "Revolution" even though it was the "Hey Jude" B-side, a fact that my brother and I attributed to the quietistic message radio stations hoped people would glean from it. But on the other hand, "Revolution" is intense and heartfelt (certainly not a "blissed-out" song), reflecting taking the violent emotions of the time seriously, whereas the Stones' "Street Fighting Man" comes off in retrospect as phony and insincere playing to the audience (albeit with a great riff). Showing once again one of the Beatles' chief advantages over the Stones. Perhaps because they were provincials who had to make things up for themselves rather than (until they made it big) plugged-in London hipsters, they were less prone to just do the cool thing rather than their own thing.

The second letter dismisses the Beatles as a "kid's band, perfect for daydreaming and first romances, but not for the long haul, where only the blues and the toughest rock 'n' roll [a la the Stones] can help see you through." Yes, it certainly is easier to keep going if you don't need fresh inspiration but can just keep on doing the same thing with less and less energy and originality for decades on end.

For almost all of the great 1960s bands that kept going (e.g., Stones, Who, Kinks) I greatly prefer what I call the "before the bombast" phase of their work, meaning the early stuff before they got too grandiose and/or rigidified. Making their more inspired work pretty much coterminous with that of the Beatles, leaving aside the Stones' Exile on Main Street and Some Girls.

But of course the real dichotomy of the 1960s, identified once in a Brian Eno interview that I read, was Beatles versus Velvet Underground. With all due respect to the Stones' great early work, this one is a tougher call. Interestingly, while Eno of course endorsed the VU side of this divide, both he and John Cale (of the VU's first two albums) have done a fair amount of work that sounds more like a thoroughly de-sillified Paul McCartney than like "Heroin" or "The Black Angel's Death Song."

I have been listening in the last few days to a 1970s Cale album (Paris 1919) as well as the Eno-Cale album from 1990, both of which are pretty and melodic. So who needs the great divides eventually.

Thursday, August 25, 2005

Alan Auerbach's Wall Street Journal op-ed (subscription required) concerning the consumption tax option in fundamental tax reform is, of course, excellent and well worth reading. But his analysis reflects some underlying assumptions that I have for a long time questioned.

Though not a consumption tax advocate (his aim is simply to explain the main dimensions of the choice), Alan cites studies from his academic work suggesting that a consumption tax could increase GDP, in the long run, by as much as 9 percent (though perhaps only half as much - still not a trivial gain - if current progressivity is maintained).

Although I am more of a consumption tax advocate (assuming retained progressivity) than he is, I question these studies due to an important underlying assumption that he is entirely straightforward about. A key component of the GDP (and efficiency) gain that he finds is the wealth levy on holders of existing assets that would arise upon enactment without transition relief. Since this is ostensibly a one-time-only wealth tax, he models it as lump-sum (i.e., as having no effect on future behavior because people do not expect their wealth to be taken again).

My objection, spelled out at length in my book When Rules Change, is twofold. First, an ostensibly one-time wealth levy will not necessarily be viewed as such, since it may show a political predilection or at least willingness to use wealth levies, hence potentially affecting people's expectations, given in particular that its logic is infinitely repeatable. (Take wealth once with the solemn promise never to do it again, then repeat complete with fresh promise.) This is not necessarily to condemn the wealth levy, but to suggest that it might have similar distortionary effects to a standing wealth tax. Who is right on this depends on how people's expectations actually end up being affected, a tricky empirical question that would likely depend on the context. Alan's view, presumably, is that the wealth levy's being a kind of byproduct of the dramatic change in tax base makes the claim that it is being levied once and once only more politically credible. Certainly not a silly view, but consider that rate increases in a consumption tax can have the same wealth levy effect as introducing the tax (which is itself merely a rate increase from 0% to whatever is the starting rate or set of rates). And consider that the plea for transition relief would presumably have been made and consciously rejected by Congress, adding to the likelihood of its affecting expectations.

Second, I think of the wealth levy as conceptually and practically distinct from the shift from an income tax to a consumption tax. As I discuss in When Rules Change, it results, not from the change in tax base itself, but from the change in what I call "accounting methods." That is, it results from shifting from a system with income tax style accounting, where certain expenses are capitalized and allowed only over time, to a system with cash flow accounting or expensing of all business-related outlays. Yet one could have a consumption tax with income tax-style accounting (deferred deductions but interest on basis to make them expensing-equivalent in present value). Indeed, David Bradford actually proposed this in his later X-tax refinements because he didn't like the transition hit that Alan relies on. In theory, moreover, though making it work would be tricky, one could have an income tax with expensing-style accounting (e.g., you are allowed up front the present value of the entire future stream of deductions for economic depreciation).

If you like the ostensibly one-time capital levy, you could have it without switching tax systems. As Bradford showed, wiping out income tax basis, once and once only, while otherwise retaining the current system would impose a comparable transition hit, although admittedly it might be trickier to make people believe the "once and once only" claim. Or we could enact, say, a one-time 25% wealth tax, plus a constitutional amendment to stop us from doing it again.

At the least, the merits of the wealth levy seem to me analytically separate from the income to consumption tax change, since it results from a conceptually distinct "accounting" change and could be done without the broader change (or not done while doing the broader change).

The 9% GDP growth finding must therefore be viewed in the context of its including the impact of a wealth levy that is distinct from the change of tax base as such (even if brought about thereby), and that is assumed to be credible to prospective investors as a one-time-only event.

Alan and I have discussed this issue in the past, and I think we agree about the basic analytics. Perhaps we will have a chance to discuss it further. For those who follow the NYU Tax Policy Colloquium, which I co-taught with David Bradford until the tragedy last February, I will be co-teaching it with Alan in winter/spring 2006, which he will spend at NYU as a visitor.

Wednesday, August 24, 2005

I'm just back from vacation with the fam on Montauk, LI, jumping waves at the beach on the ocean side when not grilling various ocean or land meats or playing either miniature golf with my kids, or else Scrabble or the highly recommended Blokus (which ought to be called "Lebensraum") with my wife. She thinks my playing style in these games is too ruthless (I think it's simply the logic of how to play the games), but has become persuaded that she has to match it. Tit for tat, the oldest rule in the book.

Beachtime reading:

(1) Levitt & Dubner, Freakonomics - a fun read though not much that is new for people who already know about the economics of information and about Levitt's often very interesting research.

(5) John M. Barry, The Great Influenza - horrifying story, albeit with some standard nonfiction bestseller genre touches, of the 1918 horrors that may have killed 50 to 100 million people worldwide, aided by US government decisions of such chilling stupidity [less of a cliche to use the word here] as to bring to mind, well, the present. Writing style is a bit tired and annoying sometimes - lots of one-sentence paragraphs that might as well have exclamation points - but worth reading for the content.

Sunday, August 14, 2005

One interesting thing about the Cindy Sheehan story is that it is potentially such an easy opportunity for Bush to score political points. The big focus is on why he won't meet with her. Well, it would be pretty darned easy for him to meet with her. A lot easier than, say, making any headway in the Iraq debacle. So it is a politician's dream: he is facing growing demands that he do something that would be incredibly easy for him to do.

Maybe that is where we're headed. But between Bush's mania for showing that he never gives in or changes his mind, and, I am guessing, a feeling of terror about having to leave his protective bubble for a few minutes and meet a woman who is angry at him because she lost (he lost) her son, perhaps this incredibly easy thing is more than he can do. We will see.

Saturday, August 13, 2005

I heard an interesting tale about Bush Administration numbers fakery today, actually from my parents (who certainly have no inside information). They noticed that lately, whenever you hear about the Administration's inflation figures, for example on news radio, it is always about something called "core inflation."

Core inflation is an inflation calculation minus information about food and energy.prices. These are excluded from the measure on the view that they are more volatile, presumably because they are subject to such shocks as a hurricane or drought that destroys crops, or an international oil market disruption. This may distinguish them from structural factors in price movements that might be considered more likely to just keep going on a particular path.

Anyway, core inflation has been around as a measure since 1957. But it was not until now being treated by a U.S. Administration as the main inflation measure to discuss publicly.

Especially with this Administration's track record on - well, just about everything - it is natural to be more than a bit cynical about its reasons for emphasizing core inflation. I am reminded of their totally shifting attention from the on-budget deficit, which excludes the Social Security surplus, to the unified budget deficit, which is smaller by reason of including it.

In short, the obvious reason that comes to mind for their emphasizing core inflation, rather than the CPI, is that it gives a lower number.

I have an even better measure to propose - the "sample consumer product inflation measure." For short, we could call this the SCPIM, to be pronounced Sick-Pim. This new measure determines the inflation rate based on a single consumer product that has been picked to stand for the rest. (Kind of like polling.) The product we will use first is televisions, or maybe flat screen TVs or some such thing. And don't whine about the need (as with polling) for a broader sample - heck, there are hundreds of thousands if not millions of TVs being sold each year.

Given how TV prices have been going in real terms (adjusting for features and quality) for at least 20 years, basing the Sickpim on TV prices is likely to show that what we really have is a deflation problem. Meaning that we need lots more tax cuts in order to stop it from getting out of hand.

On a more serious note, this shift to using core inflation, if sufficiently demonstrable, looks like a story that Paul Krugman ought to consider covering.

Wednesday, August 10, 2005

Evidently, the best cure around is billions of dollars worth of debt-financed pork.

From today's New York Times, describing the miracle in which Bush actually left his ranch to go to Illinois for a public signing of the supposedly $286.4 trillion (but actually higher than that) transportation bill:

"The transportation bill includes money for thousands of projects across the country. To put it another way, it has something for every state and just about every Congressional district, as reflected in the votes that enacted it in late July: 412 to 8 in the House and 91 to 4 in the Senate.

"Critics of the bill have complained that it is wasteful. But the president, who flew to Illinois from his ranch in Crawford, Tex., rejected that view. 'It accomplishes goals in a fiscally responsible way,' he said.

"Mr. Bush heaped praise on Speaker J. Dennis Hastert, whose district includes Montgomery and who introduced the president today. Mr. Bush also had warm words for other Republicans who helped to fashion the bill and who accompanied him today: Senator James M. Inhofe of Oklahoma and Representatives Bill Thomas of California, chairman of the House Ways and Means Committee, and Tom Petri of Wisconsin, who is on the House Transportation and Infrastructure Committee.

"But in a striking example of friendliness across the political divide, Mr. Bush said he was proud to be with Gov. Rod R. Blagojevich, Senators Richard J. Durbin and Barack Obama of Illinois, and Representative Rahm Emanuel of the Chicago area - Democrats all."

This is followed by several more paragraphs of nauseating bipartisan encomiums.

Friday, August 05, 2005

The cover story in the latest New Republic is an article by the economist Laurence Kotlikoff and the author Niall Ferguson describing what they call the "New New Deal," ostensibly a plan the Democrats should advance in lieu of Bush's idiotic Social Security "reform" to show that they have constructive ideas to eliminate the fiscal gap. Early Democratic blogger responses, such as by Matthew Yglesias in tpmcafe.com and Kevin Drum in washingtonmonthly.com are not encouraging, to say the least. Apart from disliking the substance, they note that Kotlikoff and Ferguson would have to be quite mad to think the plan had possible political appeal for the Democrats at the current juncture. I myself would cut Kotlikoff and Ferguson a large break on this point, since they are trying to get the ideas out there rather than to make practical short-term political suggestions to the Democrats. So what about the substance of their plan as a longer-term objective?

A word of disclosure here: the only one of these individuals whom I know personally is Kotlikoff, with whom I am on friendly terms. I feel that if I have learned a fair amount from him, although I certainly have many disagreements with him. (For example, I see no basis for his definition of "inter-generational equity" as having all age cohorts pay the same lifetime net tax rates.) So I am predisposed to be at the least much less hostile, and all the more so because, despite my intense anti-Bush sentiments, I am certainly no conventional Democrat or even New Democrat and would be bipartisan or non-partisan if the Republicans were still sane, adult, and in favor of constitutional democracy.

Anyway, the Kotlikoff plan, as I will call it since he is evidently its main designer, has three components that I will comment on in turn:

1) REPLACE THE INCOME AND PAYROLL TAXES WITH A 33% RETAIL SALES TAX (RST) PLUS A REBATE. I'll start with the good news. The rebate is like a zero bracket but better. To illustrate, suppose we had an income or consumption tax with a $20,000 exemption and a 40% rate above that. Someone who earned or spent $20,000 would get an $8,000 benefit from the zero bracket, but someone who earned or spent zero would get no benefit, as she wouldn't have paid tax anyway. Kotlikoff gives everyone the $8,000 in effect (using my numbers). To put it another way, Kotlikoff has a demogrant instead of a zero bracket, which I would certainly say is better assuming proper integration with the welfare system (a subject I don't have space for here).

The bad news is that just about everyone with serious institutional knowledge realizes that the RST is a terrible idea administratively. A value-added tax (VAT) can be substantively equivalent, but leaves much more of a paper-matching and audit trail for compliance purposes. And existing RSTs at the state and local level have horribly pockmarked tax bases, leaving out lots of things and double-taxing others due to screw-ups with the business-level exemption. A really bad model to follow, I would say.

Also, as a business-level tax, the RST has no adjustment for personal or household circumstances, other than the amount spent on consumption. So we have the Graetz problem (from my earlier posts on Michael's idea) all over again, although at least the credit side is more spelled out.

2) PHASE OUT CURRENT SOCIAL SECURITY AND REPLACE IT WITH A COLLECTIVE "PERSONAL SEECURITY SYSTEM" - Everyone would pay what is in effect a 7.15% payroll tax up to the Social Security ceiling - so the payroll tax isn-t really repealed in full - and notionally deposit it in a personally owned "account." But the Social Security Administration would invest all the money, on everyone's behalf, in a market-weighted global index fund. So everyone would have the same portfolio and get the same rate of return (at least if they retired in the same year). Plus the government would guarantee no loss to contributors (i.e., a real return of no less than 0%).

Unlike the Bush plan, this one is fully funded - assuming Congress ignores the revenues because they are deemed to be in individual accounts - and it achieves risk-sharing among participants and economies of scale. I am liking it better as I think about it a bit more. Essentially it amounts to forcing everyone to save 7.15% of their first $90,000 of earnings and invest it prudently, assuming that Congress doesn't undo the saving by spending more and/or taxing less in the rest of the budget, which the ownership of the accounts is supposed to accomplish.

3) REPLACE MEDICARE AND MEDICAID WITH RISK-ADJUSTED VOUCHERS THAT GIVE EVERYONE THE SAME BASIC HEALTH INSURANCE COVERAGE FROM PRIVATE INSURERS - For example, you might get a $150,000 voucher if you are 75 and have colon cancer, as opposed to a $3,500 voucher if you are a healthy 30-year old single (their example). Again this raises issues I can't discuss in this already-long entry, but this is a serious idea. One question it raises is whether the government could get the pricing sufficiently well-adjusted and what would happen if it couldn't. A second is whether market forces, which the plan relies on after socializing health risk, work well enough in this particular consumer market. Medicine is a pretty bad market no matter what (consumers don't know much, those who do the diagnosis have an interest in selling more services, etc. - think of auto repair mechanics but with higher stakes). So market solutions may not work very well here, although one can be confident that non-market solutions won't work very well either.

Anyway, this is a serious plan apart from the retail sales tax. Why not make that a VAT, or better still an X-tax so there can be brackets, if desired, not limited to the better-than-zero-bracket aspect of having a demogrant?

Thursday, August 04, 2005

President Bush has never exercised his veto power, but he brandished it over major transportation legislation for two years, threatening Congress with the V-word should lawmakers break the bank in pursuit of home-state road and bridge work.

So when Congress delivered transportation legislation with a price tag put at $286.4 billion, the administration claimed victory, noting the final amount was just $2 billion above the White House's limit and far below what senior members of Congress wanted.

But as details of the measure came under closer inspection this week, the spending picture got a bit blurry. In a piece of legislative legerdemain, Congress managed to stuff an extra $8.5 billion into the highway bill and still meet Mr. Bush's demands by requiring that the added money be turned back to the Treasury on Sept. 30, 2009, the day the bill expires....

Budget watchdog groups, already upset at spending they equate to highway bill robbery, say the maneuver is the crowning offense perpetrated by a profligate Congress and exposes the administration as co-conspirators.

"They have this paper tiger approach of holding down the total cost when in reality Congress got its way," said Steve Ellis, vice president for programs at Taxpayers for Common Sense. "Everyone gets to walk away happy."

He and other critics portrayed the maneuver, known in federal budget parlance as a rescission, as a classic example of using the calendar to mask spending excess. They doubt the money will ever be seen again, noting that Mr. Bush and many of the lawmakers responsible will no longer be in office when time runs out on the new highway plan….

President Bush is apparently not disturbed, telling an audience in Texas on Wednesday that he intends to sign the highway measure soon. "We had a little problem getting that bill done over the last couple of years because we had a disagreement about the right number," he said. "I felt that the number ought to be a fiscally responsible number. We worked hard with members of the Senate and the House. I'll be proud to sign a fiscally responsible highway bill next Wednesday in the state of Illinois."

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 24 and 21) as well as three cats. For my wife Pat's quilting blog, see Patwig’s Blog.